Delaware Needs More than Two Tiers of Income Tax
On the issue of basic fairness, and also because we need to raise more revenue than our basically flat income tax rate allows, it is time for Delaware for add a few more tiers to its progressive tax structure. As it stands now, Delaware has two tax rates it taxes you at. If you make under $60,000, you are taxed at one percentage. If you make over $60,000, you are taxed at another percentage. The unfairness and ridiculousness of this system cannot be overstated. Someone making poverty level wages (i.e. under $18k) is taxed the same rate as someone making $55k. And someone making $14 million a year is taxed the same as someone making $90k.
Delaware has a $63 million budget shortfall, and we cannot make that shortfall up and deal with the cost of Medicaid simply with spending cuts. It is time that Delaware adds more tax rate tiers above and below the 60k dividing line. If you agree, please consider signing this petition. And thank you.
Further, as we are in the midst of the Joint Finance Committee’s hearings on the budget, it is important to note that because of the ongoing Sequester situation in Washington, Delaware will lose federal funding on a host of projects if the Sequester cuts go through. For example, as Ezra Temko of the Americans for Democratic Action (ADA) noted in a recent press release, “Delaware will lose $1.7 million in special education grant funding, which will impact over 800 students.” If the Sequester does go through (and I believe it will), then Delaware will need another mechanism to fill the gaps caused by federal spending cuts. A more progressive tax structure may be one of the answers.
The ADA is holding a press conference on these topics on Wednesday, February 20 at 10 am at Legislative Hall at the base of the main staircase on the main floor. This event is being co-sponsored by the Delaware Public Employees Council 81, American Federation of State, County, and Municipal Employees (AFSCME) and the National Committee to Preserve Social Security & Medicare (NCPSSM). This conference is being held prior to the JFC’s hearings on health and social services spending, so if you have the time to attend the press conference, you might want to stick around for the following JFC public hearings: Long Term Care (10:30), Public Health (11:00), Social Services (12:15), and Medicaid & Medical Assistance (1:15).
The problem is our politicians know most of those upper-tier earners personally.
I signed. Delaware’s flat tax is ludicrous.
Froom the DE tax table (with no credits, deductions, etc.)
A person earning $18,000 would have a tax liability of $1125.
A person earning $60,000 would have a tax liability of $7113.
What should the person making $18,000 be paying?
What should the person making $60,000 be paying?
I’m kind of a flat taxer when it comes to actual tax rates, except my definition of earned income would include all income. While I am supportive of better taxation policy to ensure that taxes are equalized, too much income is allowed to be excluded. Until there is some restructuring of the term “earned income,” I am not supportive of any change. If you earn a buck, 10 cents goes towards government and society. I don’t care how many of those bucks you earn, everyone one of them gets assessed. The 10% might not be the right percentage, but whatever it needs to be it should apply to all. What I don’t support is the taxation policy that allows those who have no earned income, because their income comes from capital gains to pay a lower rate than I have to pay for my earned income.
On the margins (well below poverty and way the heck higher than poverty), I think there is room for discussion and perhaps even an AMT kind of deal. But generally speaking, flat tax rates (not flat taxes) allows everyone to have skin in the game.
James B. Stewart pointed to research showing that cross-border migration to flee high tax rates is a combination of anecdote and myth:
http://www.nytimes.com/2013/02/16/business/high-taxes-are-not-a-prime-reason-for-relocation-studies-say.html
1. Thanks for posting about this and thank you to anyone signing on to make our income tax more progressive. The sequester is a big deal and the State of Delaware will lose 4.8% of our state revenue if it goes through because we get over $2 billion in federal grants each year. It’s appalling that Congress came up and voted for such a cowardly and devastating policy as sequestration in the first place (and yes, I understand they passed the Budget Control Act to try to stop the Tea Party from shutting down the govt.), but it is even more ridiculous that the Republicans may let it happen in order to protect multinational corporations and other folks taking advantage of the inequities in our tax system.
2. I definitely agree that our current income tax system is unfair, but I do want to clarify that we have more than two brackets. The top bracket is on taxable income of $60,000 or more. The lower brackets are $2,000+, $5,000+, $10,000+, $20,000+, and $25,000+.
3. Dave, while a flat/proportional tax may sound fair in theory, it is not. If you take the same share/rate of income from a low-income family and a high-income family, it has very different consequences for the two families. The low-income family is spending most of their income to get by. The same tax does not affect the high-income family’s comfort in the same way. A progressive tax is based on the idea that citizens should contribute towards our government based on what they can afford to pay. In Delaware, while we have a progressive income tax, it is not progressive enough to stop our tax system as a whole from being regressive. Here is Delaware specific information from a report just published by ITEP: http://www.itep.org/pdf/de.pdf
You will see that the lowest income level Delawareans, 20% of our state at less than $18,000, pay an average tax burden of 5.7%, whereas the highest income level Delawareans, the top 2% of our state making $354,000 or more, have an average tax burden of 4.2%.
4. Governor Markell is proposing cutting taxes from current levels for the top rate – taxable incomes of $60,000 or more, from 6.75% to 6.6%. That means that a Delawarean who makes $500,000 a year would be getting a tax break, while poverty-level state employees will see stagnant wages and local governments will see cuts to municipal street aid. Except for PA which has a constitutionally mandated flat income tax, our top bracket is much lower than our neighbors. In fact going back to the 1950s through 1984 Delaware has a top bracket of $100,000+ (which was worth a lot more money in the 1950s as well).
Not sure what tables Dave is looking at but the 2012 Resident Individual Income Tax Return booklet shows this:
18000 taxable income, pay $644 (which is an effective rate of 3.6 percent)
60000 taxable income, pay $2,942 (an effective rate of 4.9 percent).
Dave, I would also add that our income tax system uses marginal rates. So if someone has $100,000 of taxable income, they are only paying the top rate (currently 6.75%) on the last $40,000 of their income. That might not satisfy you, but everyone, regardless of their income level, is for example paying the same income tax rate on every dollar they make between a taxable income of $20,000 and a taxable income of $25,000.
Note that comparing PA’s tax rate to ours is comparing apples to kiwis.
PA permits NO deductions, no capital or business or rental losses, and it excludes all retirement income. This is why its flat tax rate appears so low. In context, it is similar to its neighbors.
Paul – I did read that almost 20% of Pennsylvanians qualify for some amount of tax forgiveness to help make the income tax less burdensome on lower-income Pennsylvanians. Also I would note that the legislature did pass a graduated tax system in 1971, but the PA Supreme Court struck it down.
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Also we can look to comparing Philadelphia and Wilmington taxes – and wealthy Philadelphians pay more.
DC put out a study comparing tax burdens across the biggest city in each state.
http://cfo.dc.gov/sites/default/files/dc/sites/ocfo/publication/attachments/Nationwide%20Comparison%202011.pdf
The report looks at tax rates for a hypothetical family of 3 and does so at various income levels – $25K, $50K, $75K, $100K, $125K, and $150K.
Other than at the $25,000 level where Baltimore families of 3 pay less in income tax than Wilmington families, Wilmington has a lower income tax burden, total tax burden, and tax burden as a percent of income compared to Baltimore or Philadelphia, whether a family is making $25,000 or $150,000. In fact, starting at the $50,000 level and continuing up, a Philadelphia family will pay over $2,000 more a year in income tax than a Delaware family. And that’s before one adds in sales tax. We’re not in a position where we are about to have equal tax burdens as our neighbors.
Furthermore, looking at the states that have a progressive income tax, the only Northeast state that has a lower top rate is Maine (there are states with a flat tax or no traditional income tax).
States with a progressive income tax with a higher top bracket: California, Connecticut, New Jersey, New York, North Carolina, Rhode Island, Vermont, Washington, D.C., Maryland, Oregon, Wisconsin, Hawaii, Ohio, Arizona, Kentucky, Minnesota, Iowa
States with a progressive income tax that share DE’s top bracket: North Carolina, West Virginia
States with progressive income tax with a lower top bracket: Louisiana, Arkansas, Kansas, Nebraska, Idaho, Maine, Virginia, New Mexico, Montana, South Carolina, Mississippi, Missouri, Oklahoma, Georgia, Alabama
(When you get to the bottom of progressive income taxes like Alabama, they are in a much worse state than ours… Alabama has three brackets – $0+, $500+, and $3,000+).
I used the earned income tax tables, not the AGI which the booklet shows. Also I should have used the “up to $60,000” and not the “over $60,000” numbers. The the high end would have been $4,000 and change.
Still, to the point of the topic which is state income taxes, the ITEP Report, shows that that Delaware income tax rates range from .6% on the low end to 4.7% on the high end. It looks like a progressive tax structure to me but overall not excessive and so I am comfortable with it at the moment. If the state requires more revenue and they intend to raise taxes to obtain that revenue, I would raise the low end to 1% and the high end to 5.7% or something close to that, still maintaining progessivity.
The reason the ITEP report asserts that the burden is greater on the low end is not because of income tax. Rather it is because Sales an Excise Taxes and Property Taxes. The report says that property taxes are regressive because “For average families, a home represents the lion’s share of their total wealth. At high income levels,however, homes are only a small share of total wealth.” To this I say “so what?” Property taxes are based on property, not income. If someone wants to make a case for more favorable tax treatment of lower income property owners, I am willing to listen.
Which leaves us with the Sales and Excise Taxes, for which the report said:
“Overall, state excise taxes on gasoline, cigarettes and beer take about 1.6 percent of the income of thepoorest families, 0.8 percent of the income of middle-income families, and just 0.1 percent of the income of the very best-off.”
I understand the gasoline taxes because I think that lower income people are more apt to live further from work, services, etc. and probably use more gasoline. As far as the beer and cigarettes…well, no comment, although the report did say,
“Moreover, excise taxes are typically based on volume rather than price — per gallon, per pack and so forth. Thus better-off people pay the same absolute tax on an expensive premium beer as low-income families pay on a run-of-the-mill variety. As a result, excise taxes are usually the most regressive kind of tax.”
So if I buy DogFish Head, I am getting a better tax deal than someone who buys Bud Lite? I dunno, that’s kind of a stretch in my view. If someone wants to make a case for more favorable tax treatment of Bud Lite versus Dogfish Head, again, I am willing to listen but will probably bust a gut before you are finished explaining.
I’m not trashing the report. I think it is useful information which legislators could employ to manage policy more effectively, but we need to be careful about drawing absolute conclusions. Delaware’s income tax is progressive and I would caution about using income tax policy as means to manage perceived and real inequities elsewhere. A broader discussion of the topic should include analysis of property taxes, as well as sales and excise taxes and whether they are really regressive. How about reducing the taxes on cigarettes, which would apparently reduce regressivity?
On a final note, the scope of the study was limited to Non-elederly taxpayers, which in Delaware means that 14.7% of the population was not included in the study and in Sussex County, where I live, a full 21.3% of the population was not included in the study.
1. Regarding excise taxes, it does not seem to me the report is saying lower-income folks are using more or less cigarettes, for example, than higher-income folks. But for example if a person making $20,000 spends $500 on cigarettes, that’s 2.5% of their income. If a person making $200,000 spends $500 on cigarettes, that’s 0.25% of their income.
2. The issue is not about the theory of whether our income tax should be more or less progressive. It’s about the fact that our state is facing a budget shortfall, which could increase depending on a number of factors, and that we need to make up that budget shortfall. Governor Markell is proposing leaving the brackets alone but is proposing lowering taxes from current rates – from 6.75% to 6.6% – for those with a taxable income of $60,000 or more – and not allowing them to sunset to 2009 levels. He is also proposing keeping state employee pay stagnant and cutting open space preservation, farmland preservation, municipal street aid, and community transportation funds. He is proposing making two other temporary taxes permanent and lowering another tax but not allowing it to sunset to 2009 levels. And even with all of this for FY2014 to make up a projected $56 million budget shortfall, it still leaves a projected budget shortfall for FY2015 of $113 million. So our budget is not sustainable and changes are needed. The question is – what is the fairest way to balance our budget?
Right now folks with a taxable income of $60,000 or more have seen an income tax rate of 6.95% in 2010 and 2011 and an income tax rate of 6.75% in 2012 and 2013. Should we be lower taxes further – either to 6.6% as the governor proposed or to 5.95% as will happen automatically without legislative action – for folks with a taxable income of $60,000 or more? Can we afford to do so? Perhaps we can afford to do so, but perhaps we can’t afford to lower taxes for folks with a taxable income of $100,000 or more. The issue right now is not about whether or not we want a fairer tax system for the sake of a fairer tax system, it’s that our state government needs additional money, through revenue or cuts, and we have to decide the best way for that to happen.
Dave – let me add, thank you for having a respectful dialogue on this and being thoughtful about this issue.
PRESS CONFERENCE TIME CHANGED TO 9:30AM
JFC has changed their schedule and will now be starting public hearings at 10am, so we are moving our press conference 30 minuets earlier.
“but perhaps we can’t afford to lower taxes for folks with a taxable income of $100,000 or more.”
Agree. Especially in time of shortfalls. But even when there are surpluses. I personally prefer to have rainy day flexibility.
“The issue right now is not about whether or not we want a fairer tax system for the sake of a fairer tax system, it’s that our state government needs additional money, through revenue or cuts, and we have to decide the best way for that to happen.”
And I also agree.
By the way I am not anti tax. I’m just a pragmatist and recognize that there are opportunity costs and real costs to everything we do and when we are resource limited we have to make trade offs. Also, I know the report wasn’t implying that the lower income consume more cigarettes. I was suggesting that the report was sorta jumped the shark when they included cigarettes and beer in order to reach their conclusion about taxes being regressive.
Thank you for thanking me. I don’t approach things with my mind made up, so being able to have respectful discussions is not much of a challenge for me since I don’t look to score points.
Comment by Ezra Temko on 19 February 2013 at 1:15 pm:
PRESS CONFERENCE TIME CHANGED TO 9:30AM
JFC has changed their schedule and will now be starting public hearings at 10am, so we are moving our press conference 30 minuets earlier
Someone better tell the National AFLCIO I am still getting texts and emails with a 10 AM start
I hope you have enough room to do 30 minuets. Maybe try country line dancing instead?
What does our state treasurer Chip Flowers think about a more progressive tax structure?